The Dynamics of Oil and Stock Prices Comovements

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Abstract. The dynamic relationships between crude oil prices, oil sector stock price indices and stock market price indices is examined and evidence of cointegration between these variables is found. A vector error-correction (VEC) model reveals that the stock prices of companies in the integrated oil and gas sector have a long-run negative relationship with oil prices while those in the oil and gas exploration and production sector have a long-run positive relationship with oil prices. Both indices have a long-run relationship with mid- and small-capitalization stock prices. However, following shocks to oil sector indices, oil prices tends to restore the long-term equilibrium. These findings should be useful to investors in their attempts at appropriately structure their overall portfolios.

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